eBay Sets Off Fireworks with PayPal Acquisition Announcement

Four days after Independence Day celebrations in the U.S., eBay had a pyrotechnic event of its own by announcing it would acquire PayPal in a deal valued at $1.5 billion. The announcement went over the wires at 4:30 am Pacific time Monday morning, catching many reporters and analysts in their pajamas. eBay CEO Meg Whitman appeared on a television financial program 3 hours later and looked like she had pulled an all-nighter, but was enthused about the deal.

eBay and PayPal have had a symbiotic relationship over the past 3 years, at the same time competing fiercely for the online payment services market. The PayPal product launched in October 1999 and allowed buyers to send payments to sellers electronically. The service quickly caught on since it helped speed e-commerce transaction cycles, was easy to use, and had an extremely generous referral awards program. Users earned $10 for each new person that signed up for PayPal as a result of their referral, with the potential to earn up to $1,000 in total. Eager for the $10 rewards, sellers advertised the PayPal service in their auction listings on eBay, and PayPal quickly gained market share. PayPal had originally launched as a wireless payment service, but quickly discovered from its users that eBay was its "killer app."

eBay purchased a credit card processing company called Billpoint in May of 1999. eBay beta-tested the service until a full launch in April 2000, after entering into a deal in March 2000 with Wells Fargo bank. The Billpoint service was never able to gain traction in the same way that PayPal had.

eBay's biggest disappointment came in the fall of 2001 after the September 11th terrorist attacks. eBay created an "Auction for America" charity program, hoping to raise $100 million with the help of its members. But many members were outraged that eBay was forcing them to use the Billpoint payment service in order to participate in the charity auctions, feeling particularly upset that PayPal was excluded from the program. eBay raised about $10 million for the Auction for America charity. That may have been eBay's wake-up call that its users were never going to embrace its own payment service to the extent it wanted.

In February 2002, eBay bought back Wells Fargo's 35% share in Billpoint for $43.5 million, and by April, rumors swirled that eBay would purchase PayPal. The acquisition announced yesterday still must go through regulatory hurdles, and it is expected that the government will review the acquisition for possible antitrust issues.

James Kim, CEO of ePier, expects eBay to have a rough road when regulators take a look at the industry. "There are only a handful of payment services in this industry," Kim said. "This merger is in the worst interest of consumers. Is having fewer options a good thing?" ePier is an online auction site that has operated since 1998. It offers its own online payment service, PayMadeEasy, that may be used on ePier and on other sites.

Online-auction buyers and sellers were for the most part unhappy with the news, fearing what an eBay-run PayPal would look like. PayPal is Web-site independent and open, while eBay is a proprietary system. Some PayPal users fear that PayPal will become more proprietary under eBay.

"There is concern on behalf of consumers that they have a limited choice. More of the transaction is captured by one particular entity," said Steven Nerayoff of iOffer.com, a trading community offering negotiated e-commerce.

There was concern among sellers Monday that eBay would raise fees for using PayPal. In addition, users did not like the idea that their off-eBay activities conducted through PayPal will be accessible to eBay once the acquisition is completed. Many sellers use multiple venues and their own Web sites to sell their wares, and would likely feel exposed knowing eBay would have access to their total selling activity, as well as any purchases made with PayPal.

"If you accept PayPal on your own Site, or ePier, or Yahoo!, they (eBay) know who you're selling to, and have a vehicle to market to those people. It's very insidious," said one online seller.

Likewise, other e-commerce sites might feel discomfort knowing eBay has access to their transaction information. eBay mentioned at its user conference last month that it planned to make sales data accessible to its sellers, though it did not indicate if there would be a charge for doing so. If eBay owned PayPal, it would have access to sales data from other sites as well, and could very well bundle all data into its "data warehouse."

Another area of concern is what would happen if an eBay user was suspended (rightly or mistakenly). Would eBay ban the user from using its PayPal payment service as well? There is some precedent for believing this might be the case, given that users who are suspended for suspected shill bidding on eBay auctions have their eBay Storefront (fixed-price) items removed as well.

eBay promised that it would integrate PayPal into its auction service, making it "easier and safer" for users to complete transactions. eBay did not elaborate how using PayPal would make transactions safer for its users other than to say they would have one large database of transaction and user information.

Many third-party software vendors that provide auction-management tools to eBay sellers have already integrated with the PayPal service, making it easy for eBay sellers to accept PayPal and making it easy for eBay buyers to use PayPal upon checkout. It is uncertain as to whether eBay would begin charging those vendors for the use of PayPal's API, which is currently free. eBay charges all third-parties for using its API (Application Programming Interface), which provides a way for third-parties to access eBay data.

PayPal stockowners will receive .39 shares of eBay for each share of PayPal. The deal is valued at $1.5 billion based on Friday's stock close. The valuation will fluctuate according to eBay's stock price, with no minimum dollar value set to protect PayPal shareholders. The deal is expected to close at the end of the year.

Just in time for New Year's Eve fireworks.

About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

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